Canadian startups on the market—and on the move: PwC

Report shows that a majority are looking to exit- quickly – through acquisition

TORONTO—Canadian startups want to be acquired, but are cautious about going public and aren’t thinking about building for the long haul, says PwC’s 11th annual Emerging Companies Survey released today. The report surveys 150 Canadian startup CEOs on the challenges, opportunities, and strategic priorities surrounding their business.

Emerging companies are indeed looking to leave the market, rather than grow their business in Canada, as nearly eight-in-ten (78%) are looking at some sort of exit strategy. Nearly two-thirds (63%) of all respondents are eying an acquisition—up significantly from last year’s 44%--while far fewer (7%) are looking towards an IPO, or ‘going public’. Businesses are also looking to exit quickly—40% plan to leave the market in between one and three years.

“The results show that Canadian startups are not looking to build business for the long term—instead, they want to build to a proof point and then sell,” says Eugene Bomba, Canadian Emerging Company Services Leader at PwC. “This trend impacts the made-in-Canada market, as with so many companies looking towards an acquisition, it’s expected that large US companies will be looking to acquire Canadian businesses predominantly for talent through M&A activity.”

Canadian companies discouraged by IPO landscape
Canadian startups are concerned about a challenging IPO market, particularly with regard to their peers. When asked what would make going public more attractive, 69% said they would be encouraged by seeing other prominent Canadian technology companies on the market; however, with many recent high-profile technology IPO flops in the US, appetite in Canada is low. The report also notes that because of these IPO challenges, investors are putting new technology IPOs under much more intense scrutiny and demanding clear signs of traction, critical mass, growth potential and, most importantly, revenue generation.

“Despite seeing better valuations in the public market recently, most emerging companies still aren’t willing to take the risk to IPO,” says Bomba.“The costs associated with going public are often too high for a small business to assume, particularly given the recent IPOs that have stumbled out of the gate.”

Startups not always prepared to be sold
However, considering the relative appeal of being acquired, companies indicate a startling lack of acquisition preparedness. While many have ensured that their taxes and corporate documents are up to date, other areas are being given far less attention. For example, less than a quarter (24%) have reviewed or audited their financial statements and only 11% have completed a formal valuation. Perhaps most concerning is that a significant percentage (22%) have taken no steps towards preparing for a sale.

“While exiting through acquisition doesn’t bring about the same level of scrutiny as an IPO, M&As do carry their own set of challenges and require a significant amount of due diligence,” says Bomba. “A major component of a successful acquisition is preparedness, so that when the time is right companies are in the position to negotiate a strong sale.”

Other highlights from the 2014 Emerging Companies Report include:

Funding tops challenges: When asked what their biggest challenge was in their most recent fiscal year, 35% of respondents said funding. In second was revenue generation at 28%, and well back at 10% was attracting and retaining talent—the top challenge for startups just two years ago.

Canada still main source of revenue: A significant majority (62%) of respondents’ revenue was generated in Canada, followed by the US at 25%.

Online sales a key driver: Most (70%) respondents are selling products and services through digital channels, and more than half (58%) indicated that between 75 and 100% of annual revenue came from online sales.

About PwC Canada
PwC Canada helps organizations and individuals create the value they’re looking for. More than 5,700 partners and staff in offices across the country are committed to delivering quality in assurance, tax, consulting and deals services. PwC Canada is a member of the PwC network of firms with more than 184,000 people in 157 countries. Find out more by visiting us at www.pwc.com/ca.